Consumer and Community Affairs

The Board's Division of Consumer and Community Affairs (DCCA) has primary responsibility for carrying out the Board's consumer protection program. DCCA augments its dedicated expertise in consumer protection law, regulation, and policy with resources from other functions of the Board and the Federal Reserve System to write and interpret regulations, educate and inform consumers, and enforce laws and regulations for consumer financial products and services. Key elements of the division's program include

rulemaking, utilizing a team of attorneys to write regulations that implement legislation, update regulations to respond to changes in the marketplace, design consumer-tested disclosures to provide consumers consistent and vital information on financial products, and prohibit unfair and deceptive acts and practices;

supervision and enforcement of state member banks and bank holding companies and their nonbank affiliates to ensure that consumer protection rules are being followed;

consumer complaint and inquiry processes to assist consumers in resolving grievances with their financial institutions and to answer their questions;

consumer education to inform consumers about what they need to know when making decisions about their financial services options;

research to understand the implications of policy on consumer financial markets;

outreach to national and local government agencies, consumer and community groups, academia, and industry to gain a broad range of perspectives, and to inform policy decisions and effective practices; and

support for national and local agencies and organizations that work to protect and promote community development and economic empowerment to historically underserved communities.

Rulemaking and Regulations

Credit Card Reform

In May 2009, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit Card Act) codified and expanded existing Federal Reserve regulations prohibiting unfair credit card practices. Among other things, the new rules ban harmful practices and require greater transparency in the disclosure of the terms and conditions of credit card accounts. Throughout 2009, the Federal Reserve worked to implement the Credit Card Act.

Consistent with the effective dates set by Congress in the legislation, the Federal Reserve's rulemakings to implement the Credit Card Act were divided into three stages. As discussed below, the Board has completed the first two stages of rulemaking. The third stage will be completed later in 2010.

Stage One

The first stage of the Board's implementation of the Credit Card Act includes provisions with an effective date of August 2009.1

45-Day Notice Requirement for Significant Changes

The new rules require creditors to provide written notice to consumers 45 days before increasing an annual percentage rate (APR) on, or making another significant change to the terms of, a credit card account. The notice requirement is triggered by increases in rates applicable to purchases, cash advances, and balance transfers. Creditors must also provide notice when changes are made to the terms that are required to be disclosed at account opening, including those terms that are most important to consumers and that can have a significant impact on the cost of credit for a consumer: key penalty fees, transaction fees, fees imposed for the issuance or availability of credit, any grace period, and the balance computation method.

Consumer's Right to Reject Rate Increase or Change in Terms

In addition to the advance notice, consumers must be informed of their right to reject the increase or change before it goes into effect. If a consumer rejects the increase or change, the creditor may not impose a fee or charge, treat the account as in default, or require immediate repayment of the balance on the account.

Periodic Statements Must Be Mailed 21 Days in Advance

The rules require creditors to mail or deliver periodic statements for credit cards at least 21 days before the payment due date and the expiration of any grace period. This requirement must be met before creditors can treat a consumer's payment as late or impose additional finance charges.

Stage Two

The second stage of the Board's implementation of the Credit Card Act includes provisions with an effective date of February 22, 2010.2

Restricting Rate Increases for Existing Balances

An increase in the interest rate that applies to existing balances on a credit card account can come as a costly surprise to consumers who relied on the rate in effect at the time they opened the account or used the account for transactions. Subject to certain exceptions, the new rules generally prohibit credit card issuers from increasing the rates and fees that apply to existing balances, including when an account is closed, when an account is acquired by another institution, and when the balance is transferred to another account issued by the same creditor. The exceptions include temporary rates that expire after a specified period, rates that vary with an index, and accounts that are more than 60 days delinquent.

Evaluation of Consumer's Ability to Pay

Under the new rules, credit card issuers are required to establish and maintain reasonable policies and procedures to consider a consumer's ability to make required minimum payments each billing cycle (based on the full credit line and including any mandatory fees) before opening a new credit card account or increasing the credit limit for an existing account. Reasonable policies and procedures include consideration of at least one of the following in assessing the consumer's ability to pay: (1) the consumer's ratio of debt to income; (2) the consumer's ratio of debt to assets; or (3) the income the consumer will have after paying existing debt obligations.

Age Restrictions

The rules also impose specific requirements for opening a credit card account or increasing the credit limit on an existing account when the consumer is under the age of 21. In particular, an issuer cannot issue a credit card to a consumer younger than 21 unless their application includes either: (1) information indicating that the underage consumer has independent ability to make the required minimum payments for the account, or (2) the signature of a cosigner over age 21 who has the ability to make those payments and who assumes joint liability for any debt on the account.

Rules for Marketing Credit Cards to Students

The rules also prohibit creditors from offering a college student any tangible items (such as t-shirts, gift cards, or magazine subscriptions) to induce the student to apply for a credit card or other open-end credit product if the offer is made on or near a college campus or at an event sponsored by a college. In addition, colleges must publicly disclose their agreements with credit card issuers for marketing credit cards, and card issuers must make annual reports to the Board regarding those agreements.

Restricting Over-the-Limit Fees

The rules generally require creditors to obtain a consumer's express election (or "opt in") to the payment of transactions that exceed the account's credit limit before the creditor may impose any fee for those transactions. Credit card issuers are also prohibited from imposing more than one over-the-limit fee per billing cycle and may not impose an over-the-limit fee for the same transaction in more than three consecutive billing cycles.

The rules also prohibit credit card issuers from

assessing an over-the-limit fee because the issuer did not promptly replenish the consumer's available credit (such as after the consumer makes a payment);

conditioning the amount of available credit on the consumer's consent to payment of over-the-limit transactions; and

imposing an over-the-limit fee if the consumer's credit limit is exceeded solely because of accrued interest charges or fees on the account.

Additional Consumer Protections

The wide-ranging consumer protection regulations adopted by the Board also include

Credit card issuers are required to establish procedures to ensure that the administrator of an estate can resolve the outstanding credit card balance of a deceased accountholder in a timely manner.

Credit card issuers are required to allocate a consumer's payment in excess of the required minimum payment first to the balance with the highest rate.

Credit card fees charged to a credit card account during the first year after account opening may not exceed 25 percent of the initial credit limit.

Credit card issuers may not impose interest charges on balances for days in previous billing cycles as a result of the loss of a grace period (a practice sometimes referred to as "double-cycle billing"). Card issuers also are prohibited from imposing interest charges on the portion of the balance that has been repaid when a consumer pays some but not all of a balance prior to expiration of a grace period.

Credit card issuers may not charge a fee for making a payment except for payments involving an expedited service by a service representative of the issuer.

Credit card issuers must disclose on the periodic statement sent to consumers: (1) the amount of time and total cost (interest and principal) involved in paying the consumer's balance in full by making only the required minimum payments; and (2) the monthly payment amount required to pay off the consumer's balance in 36 months and the total cost (interest and principal) of repaying the balance in 36 months.

Overdraft Services and Gift Card Rules

Restrictions on Overdraft Fees

In November, the Board announced rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer opts in, or affirmatively consents, to overdraft services for these transactions.3 Overdraft fees can be particularly costly in connection with debit card overdrafts because the dollar amount of the fee may considerably exceed the dollar amount of the overdraft.

Consumers often are enrolled in overdraft services automatically, without their express consent. Consumer testing by the Board indicated that many consumers are unaware that they can incur overdrafts for ATM or one-time debit transactions, believing instead that these transactions will be declined. In contrast, consumer testing by the Board showed that consumers generally want their checks and automated clearing house (ACH) transactions paid even if the payment results in an overdraft fee being assessed.

Opt-In Requirement

The Board's rules require institutions to provide consumers with the right to opt in, or affirmatively consent, to the institution's overdraft service for ATM and one-time debit card transactions. The notice of the opt-in right must be provided, and the consumer's affirmative consent obtained, before fees orcharges may be assessed on the consumer's account for paying such overdrafts. The opt-in requirement applies to both existing and new accounts.

Protections for Consumers Declining Overdraft Coverage

The rules prohibit institutions from conditioning the payment of overdrafts for checks, ACH transactions, or other types of transactions on the consumer consenting to the institution's payment of overdrafts for ATM and one-time debit card transactions. For consumers who do not consent to the institution's overdraft service for ATM and one-time debit card transactions, the rules require institutions to provide those consumers with account terms, conditions, and features that are otherwise identical to those they provide to consumers who do consent. The rules include a model form developed through consumer testing that institutions may use to satisfy the opt-in notice requirement.

The Board's overdraft rules are issued under the Electronic Fund Transfer Act and have an effective date of July 1, 2010.

Restrictions on Gift Card Fees and Expiration Dates

In November, the Board proposed rules that would restrict the fees and expiration dates that may apply to gift cards. The rules would protect consumers from certain unexpected costs and would require that gift card terms and conditions be clearly stated.4

The Board's proposed rules generally cover retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand (such as Visa or MasterCard).

Dormancy, Inactivity, or Service Fees and Expiration Dates

The proposed rules would prohibit dormancy, inactivity, and service fees on gift cards unless: (1) there has been at least one year of inactivity on the gift card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees on the card and before the card is purchased.

The proposed rules would also provide that expiration dates for funds underlying a gift card must be at least five years from the date the card was issued or the date when funds were last loaded onto the card. This information would have to be clearly and conspicuously disclosed on the card and before the card is purchased.

Additional Disclosure Requirements

The proposed rules also would require the disclosure of all other fees imposed in connection with a gift card. These disclosures would have to be provided on or with the card and prior to purchase. The proposed rules also would require the disclosure on the card of a toll-free telephone number and, if one is maintained, a website that a consumer may use to obtain fee information or replacement cards.

The Board's proposed rules would implement statutory requirements set forth in the Credit Card Act that become effective on August 22, 2010.

Mortgage and Home Equity Lending Reform

The Board proposed significant new rules designed to (1) improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (HELOCs) and (2) provide new consumer protections for all home-secured credit.5 The Board also adopted new rules to implement provisions of 2009's Helping Families Save Their Homes Act and the Mortgage Disclosure Improvement Act of 2008 (MDIA).

To shop for and understand the cost of a home-secured loan, consumers must be able to identify and understand the key terms that determine whether a particular loan is appropriate for them. The Board, working with a consultant, conducted focus groups and one-on-one cognitive interviews with more than 180 consumers from nine metropolitan areas across the United States in order to understand consumers' key concerns when shopping for home-secured credit. The results of these sessions informed the Board's rulemaking, which aims to ensure that required disclosures are presented in clear, understandable language and formatting so as to provide consumers with essential information at the appropriate time in the loan process.

Providing Meaningful Disclosures about Mortgages

The Board proposed rules in July 2009 to make disclosures about closed-end mortgages more meaningful and useful to consumers by highlighting potentially risky loan features, such as adjustable rates, prepayment penalties, and negative amortization.

Specifically, the proposal would include several requirements:

At application, lenders would have to provide consumers with a one-page list of key questions to ask about the loan being offered. The new disclosures are designed to answer those questions.

The information consumers receive within three days after application would highlight risky mortgage features (such as possible payment increases or negative amortization).

For adjustable-rate mortgages, lenders would be required to show consumers how their payments might change, including by illustrating the highest monthly amount the consumer might pay during the life of the loan.

The computation of the APR would be revised to include most fees and settlement costs, making it a better measure of the total cost of the loan.

Disclosures would show consumers in a simple graph how their loan's APR compares to the average rate offered to borrowers with excellent credit.

In addition to the early disclosures provided at application, lenders would also be required to provide final disclosures to consumers at least three days before the loan closing.

For adjustable-rate mortgages, lenders would have to notify consumers 60 days in advance of a change in their monthly payment. (Currently, notice may be given 25 days in advance.)

Creditors would have to provide monthly statements to consumers with loans that have payment options that could result in negative amortization.

Early Disclosures for Mortgage Loans

In May 2009, the Board issued final rules revising the disclosure requirements for mortgage loans in order to ensure that consumers receive information about loan costs earlier in the mortgage process.6 These new rules implement provisions of MDIA and were effective July 30, 2009.

The new rules expand on rules published by the Board in July 2008, which require, among other things, that a creditor give a consumer transaction-specific information about costs shortly after the consumer applies for a closed-end mortgage loan secured by the consumer's principal dwelling ("early disclosures"). These early disclosures must be provided before the consumer pays any fee other than a reasonable fee for obtaining the consumer's credit history. The May 2009 final rules apply these provisions to loans secured by a dwelling even when it is not the consumer's principal dwelling, such as a second home.

Moreover, these rules require that:

Creditors must deliver or mail early disclosures at least seven business days before closing.

If the APR contained in the early disclosures becomes inaccurate (for example, due to a change in loan terms), creditors must provide corrected disclosures to the consumer at least three business days before closing.

The disclosures must inform the consumer that they are not obligated to complete the transaction simply because disclosures were provided or because the consumer has applied for a loan.

The new rules also permit a consumer to waive the waiting periods and expedite closing to address a personal financial emergency, such as foreclosure.

Anti-Steering Protections

Disclosures alone may not always be sufficient to protect consumers from unfair practices. For example, yield spread premiums, which are payments from a lender to a mortgage broker or loan officer (loan originator) based on the interest rate, can create incentives for mortgage loan originators to "steer" borrowers to riskier loans with higher rates for which the loan originators will receive greater compensation. Consumers generally are not aware of the mortgage broker's or loan officer's conflict of interest and cannot reasonably protect themselves against it. Yield spread premiums may provide some benefit to consumers who choose to pay a higher rate so that the lender will fund origination costs that would otherwise be paid by the consumer.

To prevent mortgage loan originators from steering consumers to more expensive loans, the Board proposed rules that would

prohibit payments to a mortgage broker or a loan officer based on the loan's interest rate or other terms, and

prohibit mortgage brokers or loan officers from steering consumers to a lender offering less favorable terms in order to increase their compensation.

Home Equity Lines of Credit (HELOCs)

In July 2009, the Board proposed rules to enhance consumer protections for HELOCs and improve the timing, content, and format of information that creditors provide to consumers at application and throughout the life of such accounts.

The proposed rules would require certain disclosures:

At application, the lengthy, generic disclosure consumers currently receive would be replaced with a new one-page summary of the ba- sic information and risks about HELOCs.

Within three days after receiving a consumer's application for a HELOC, lenders would be required to provide disclosures specifically tailored to the actual credit terms for which the consumer qualifies. These disclosures would provide information about costs and risky mortgage features in a tabular format.

At account opening, lenders would provide final disclosures in the same format, allowing consumers to more easily compare them with earlier disclosures.

Throughout the life of the HELOC plan, lenders would provide enhanced periodic statements showing the total amount of interest and fees charged for the statement period and the year to date.

The proposed rules also would enhance certain consumer protections applicable to HELOCs:

To the extent a lender can change any terms of a consumer's HELOC plan, the lender would have to notify the consumer 45 days in advance of the change. The proposal would also improve the form and content of these notices.

Lenders could not terminate an account for delinquency until payment is more than 30 days late.

When a consumer's credit line has been suspended or reduced, creditors would have to provide additional information about the reasons for the action and the consumer's right to request reinstatement.

Notifying Consumers When Mortgage Loans Are Sold or Transferred

One of the consumer protection provisions of the Helping Families Save Their Home Act aims to ensure that consumers know who owns their mortgage loan. Because mortgages may be sold and transferred several times, borrowers can face difficulties in determining who owns their loan and who to contact about their loan. The Helping Families Save Their Home Act, which was enacted in May 2009, requires a purchaser or assignee that acquires a mortgage loan to provide the required disclosures to consumers in writing within 30 days of acquiring the loan. Although the statutory provision became effective immediately upon enactment, in November 2009, the Board issued interim final rules which pro- vide guidance for complying with the statute.7

Private Education Loan Rules

In 2009, the Board revised Truth in Lending Act rules for private education loans--loans made to a consumer by a private lender in whole or in part for postsecondary educational expenses.8 The Board's rules implement provisions of the Higher Education Opportunity Act (HEOA) and apply to loan applications received by creditors on or after February 14, 2010.

Improved Disclosure

To enhance disclosure about private education loans, the Board worked with a consultant to conduct one-on-one cognitive interviews with consumers in order to develop effective disclosures that consumers can use to understand the costs and features of these loans.

The rules specify disclosures that creditors must provide at three different times in the loan origination process: (1) with the loan application or solicitation, (2) when the loan is approved, and (3) after the consumer accepts the loan but at least three days before funds are disbursed.

Under the Board's rules, with applications and solicitations, creditors must provide consumers general information about loan rates, fees, and terms, including an example of the total cost of a loan based on the maximum interest rate the creditor can charge. The disclosure must also inform the consumer about the availability of federal student loans, their interest rates, and where the consumer can find additional information regarding those loans.

Creditors must also provide a set of transaction-specific disclosures when the loan is approved and at consumma-tion. These disclosures must include specific information about the rate, fees, and other terms of the loan that are offered to the consumer. The creditor must disclose, for example, estimates of the total repayment amount based on both the current interest rate and the maximum interest rate that may be charged. The creditor must also disclose the monthly payment at the maximum rate of interest.

30-Day Period to Accept or Reject Loan

Under the Board's rules, a consumer has the right to accept the rates and terms offered at any time within 30 days after receiving the transaction-specific disclosure provided at approval.

Three-Day Right to Cancel

A creditor must provide additional disclosures after a consumer accepts a private education loan. A consumer has the right to cancel the loan without penalty for up to three business days after receipt of this disclosure and the loan funds may not be disbursed until the three-day period expires.

Prohibition on Co-Branding

The rules prohibit creditors from using an educational institution's name, logo, or mascot in its marketing materials to imply that the educational institution endorses the loans offered by the creditor, unless the creditor and educational institution have a preferred lender arrangement under which the educational institution issues a permissible endorsement of the creditor's loans.

Consumer Credit Reporting and Risk-Based Pricing Rules

Credit reports are used to determine whether, and on what terms, consumers may obtain credit and other important products and services, and are also widely used to determine a consumer's eligibility for employment, insurance, and rental housing. Therefore, it is essential that the substantive information included in those reports is accurate. In 2009, the Board worked with other federal financial agencies to implement provisions of the Fair and Accurate Credit Transactions Act, which amends the Fair Credit Reporting Act, to impose new responsibilities on credit information furnishers and allow consumers to play a more active role in ensuring the accuracy of their own credit reports.

Credit Reporting Rules

Accuracy of Information Reported to Credit Bureaus

In July, the Board collaborated with other federal financial regulatory agencies and the Federal Trade Commission to publish rules and guidelines promoting the accuracy and integrity of information furnished to credit bureaus and other consumer reporting agencies.9

The rules require entities that furnish consumer information to credit bureaus (furnishers) to establish and implement reasonable written policies and procedures to ensure the accuracy and integrity of the information that is reported about consumers. Furnishers' policies and procedures should address matters including recordkeeping, internal controls, staff training, oversight of third-party service providers, and periodic self-evaluations.

The rules also require furnishers to include the consumer's credit limit (if applicable) among the information provided to a credit bureau. The Board and other agencies also published an advance notice of proposed rulemaking seeking to identify additional consumer information that furnishers should be required to provide to credit bureaus.

Right to Submit Disputes Directly to Information Furnisher

Under the credit reporting rules, if a consumer believes his or her credit report includes inaccurate information, the consumer may submit a dispute directly to the furnisher of the information and the furnisher must investigate the dispute. If the furnisher's investigation reveals that the information reported to a credit bureau was inaccurate, the furnisher must promptly notify each credit bureau to which the inaccurate information was provided and provide corrected information. The rules become effective July 1, 2010.

Risk-Based Pricing Rules

In December, the Board, along with the Federal Trade Commission, announced rules requiring creditors to notify consumers when, based on the consumer's credit report, the creditor provides credit on less favorable terms than it provides to other consumers. For example, if a consumer, because of information in his or her credit report, receives a mortgage with an APR higher than that offered to a substantial proportion of other consumers by that creditor, such that the consumer's cost of credit is significantly higher, the creditor must send the consumer a "risk-based pricing" notice.10

Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit offered or extended to a particular consumer to reflect the risk of nonpayment by that consumer. Information from a consumer's credit report is often used in evaluating the risk posed by the consumer.

The rules require that a notice include a statement that the terms offered to the consumer may be less favorable than the terms offered to consumers with better credit histories. The notice also must contain a statement informing the consumer that he or she may obtain a free copy of his or her credit report from the credit reporting agency identified by the creditor in the notice.

The rules give creditors the option of providing consumers with a free credit score and information about their credit score as an alternative to providing risk-based pricing notices. Creditors that use the credit score disclosure alternative generally must provide free credit scores to any consumer who applies for credit before the consumer becomes obligated for the credit. The rules become effective on January 1, 2011.

Information Privacy Rules

In November, the Board, along with seven other federal regulatory agencies, released a model privacy notice designed to make it easier for consumers to understand how financial institutions collect and share consumer information.11

The Board and other agencies developed the model privacy notice based on extensive consumer testing that involved approximately 1,000 consumers from five locations across the United States. Consumer testing confirmed the effectiveness of the model notice as compared with other privacy notices, including a form of notice commonly used by financial institutions.

To ensure that privacy information is provided to consumers in a form that is readable and understandable, the model privacy notice uses a standardized tabular format and presents information in a question-and-answer format. The rules specify the format, typeface, font size, and presentation to make it easy for consumers to find specific information on the form and compare information provided by various institutions. A financial institution that uses the model form obtains a "safe harbor" for compliance with the regulatory requirements for privacy notices.

The rule, which was issued under Regulation P, became effective on December 31, 2009.

Community Reinvestment Act Rules

In June, the Board, along with other federal financial regulators, proposed revisions to regulations under the Community Reinvestment Act (CRA) that would require the Board to consider low-cost education loans provided to low-income borrowers when assessing a bank's record of meeting community credit needs under the CRA. Under current CRA regulations, education loans are considered consumer loans, which may not be evaluated as part of a CRA assessment in some cases. The proposed revision reflects statutory changes made to the CRA by the Higher Education Opportunity Act.12

The proposal would also incorporate into the CRA regulations statutory language allowing the Board to consider capital investments, loan participations, and other ventures undertaken in cooperation with minority- and women-owned financial institutions and low-income credit unions when assessing a bank's CRA record.

Oversight and Enforcement

The Board's Division of Consumer and Community Affairs supports and oversees supervisory policy and examination procedures for consumer protection and community reinvestment laws in the oversight of state-chartered, depository institutions, and foreign banking organizations that are members of the Federal Reserve System. In addition, the division oversees the efforts of the Reserve Banks to ensure that consumer protection laws and regulations are fully and fairly enforced. Division staff provide guidance and expertise to the Reserve Banks on consumer protection regulations, bank application analysis and processing, examination and enforcement techniques, examiner training, and emerging issues. The staff develop and update examination policies, procedures and guidelines, as well as review Reserve Bank supervisory reports, examination work products, andconsumer complaint analyses. Staff members also participate in interagency activities that promote uniformity in examination principles and standards.

Examinations are the Federal Reserve's primary method of enforcing compliance with consumer protection laws and assessing the adequacy of risk management systems for consumer protection. During the 2009 reporting period, the Reserve Banks conducted 282 consumer compliance examinations of the System's 782 state member banks and one foreign banking organization.13

Community Reinvestment Act Compliance

The Community Reinvestment Act (CRA) requires that the Federal Reserve and other federal banking and thrift agencies encourage financial institutions to help meet the credit needs of the local communities in which they do business, consistent with safe and sound operations.14 To carry out this mandate, the Federal Reserve

examines state member banks to assess their compliance with the CRA;

analyzes applications for mergers and acquisitions by state member banks and bank holding companies in relation to CRA performance; and

disseminates information on community development techniques to bankers and the public through community affairs offices at the Reserve Banks.

The Federal Reserve assesses and rates the CRA performance of state member banks in the course of examinations conducted by staff at the 12 Reserve Banks. During the 2009 reporting period, the Reserve Banks conducted CRA examinations of 229 banks: 40 were rated "Outstanding," 187 were rated "Satisfactory," and two were rated "Needs to Improve."15

In June 2009, the Federal Reserve and other federal banking and thrift regulatory agencies proposed two revisions to the CRA that would incorporate new statutory requirements into the CRA regulations.16 The first revision would implement Section 1031 of the Higher Education Opportunity Act, which requires the agencies to consider low-cost education loans provided to low-income borrowers when assessing a financial institution's record of meeting community credit needs. The second revision would incorporate the CRA statutory language that allows the agencies to consider and take into account capital investments, loan participations, and other ventures between nonminority- and nonwomen-owned financial institutions and minority- and women-owned institutions and low-income credit unions.

Mergers and Acquisitions in Relation to the CRA

During 2009, the Board considered and approved four banking merger applications:

An application by Morgan Stanley, New York, NY, to acquire 9.9 percent of United Western Bancorp, Inc., Denver, CO, was approved in October.

(Two other protested applications were withdrawn by the applicants.)

Members of the public had the opportunity to submit comments on the applications; their comments raised various issues. Some comments referenced pricing information on residential mortgage loans and concerns that minority applicants were more likely than nonminority applicants to receive higher-priced mortgages. Other comments alleged that certain minority groups received preferential treatment in comparison to other minority groups; that lenders failed to make credit available to certain minority groups and to low- and moderate-income individuals and in low- and moderate-income geographies; that lenders deliberately omitted reporting race information about certain applicants, information that is required by the Home Mortgage Disclosure Act (HMDA); and that lenders had not fulfilled their CRA responsibilities. In addition, some commenters claimed that lenders engaged in high-cost predatory lending and less-than-satisfactory loan servicing activities that contributed to the current foreclosure crisis.

The Board also considered 51 applications with outstanding issues involving compliance with consumer protection statutes and regulations, including fair lending laws and the CRA; 34 of those applications were approved and 17 were withdrawn. The number of applications with CRA issues, consumer compliance issues, or both was somewhat lower in 2009 than in 2008, as was the total number of all applications received, due, in part, to the financial crisis in the banking industry. However, the applications reviewed contained significantly more complex fair lending concerns than in previous years.

Fair Lending Enforcement

The Federal Reserve is committed to ensuring that the institutions it supervises comply fully with the federal fair lending laws--the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Fair lending reviews are conducted regularly within the supervisory cycle. Additionally, examiners may conduct fair lending reviews outside of the usual supervisory cycle, if warranted by fair lending risk. When examiners find evidence of potential discrimination, they work closely with the division's Fair Lending Enforcement Section, which brings additional legal and statistical expertise to the examination and ensures that fair lending laws are enforced consistently and rigorously throughout the Federal Reserve System.

The Federal Reserve enforces the ECOA and the provisions of the Fair Housing Act that apply to lending institutions. The ECOA prohibits creditors from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex or marital status, or age. In addition, creditors may not discriminate against an applicant because the applicant receives income from a public assistance program or has exercised, in good faith, any right under the Consumer Credit Protection Act. The Fair Housing Act prohibits discrimination in residential real estate-related transactions, including the making and purchasing of mortgage loans, on the basis of race, color, religion, sex, handicap, familial status, or national origin.

Pursuant to the ECOA, if the Board has reason to believe that a creditor has engaged in a pattern or practice of discrimination in violation of the ECOA, the matter will be referred to the Department of Justice (DOJ). The DOJ reviews the referral and determines whether further investigation is warranted. A DOJ investigation may result in a public civil enforcement action or settlement or the DOJ may decide instead to return the matter to the Federal Reserve for administrative enforcement. When a matter is returned to the Federal Reserve, staff ensure that the institution takes all appropriate corrective action.

During 2009, the Board referred the following six matters to the DOJ:

One referral involved redlining, or discrimination against potential borrowers based upon the racial composition of their neighborhoods, in violation of the ECOA and the Fair Housing Act. Based on an analysis of the bank's lending practices, its marketing, the location of its branches, and its delineated assessment area under the CRA, the Board determined that the bank avoided lending in minority neighborhoods.

Two referrals involved discrimination in mortgage pricing, in violation of the ECOA and the Fair Housing Act. In one matter, the Board found that Hispanic and African-American borrowers paid higher annual percentage rates (APRs) and overages than non-Hispanic white borrowers. In another matter, the Board found that African-American borrowers paid higher APRs than non-Hispanic white borrowers. Legitimate pricing factors failed to explain the pricing disparities in either matter.

Two referrals involved discrimination on the basis of marital status, in violation of the ECOA. One referral involved a bank's policy and practice of requiring spousal guarantees on commercial loans, in violation of Regulation B. In the other referral, an institution improperly required spousal signatures for its agricultural, consumer, and commercial loans, in violation of Regulation B.

One referral involved discrimination on the basis of age, in violation of the ECOA. The lender offered customers over 50 years of age membership in a special club with preferential credit features, including a 25 basis point discount on non-mortgage loans. The ECOA generally prohibits creditors from considering age when evaluating creditworthiness, except that a creditor may consider the age of an applicant 62 years or older in the applicant's favor.

If a fair lending violation does not constitute a pattern or practice that is referred to the DOJ, the Federal Reserve acts on its own to ensure that the violation is remedied by the bank. Most lenders readily agree to correct fair lending violations. In fact, lenders often take corrective steps as soon as they become aware of a problem. Thus, the Federal Reserve generally uses informal supervisory tools (such as memoranda of understanding between the bank's board of directors and the Reserve Bank) or board resolutions to ensure that violations are corrected. If necessary to protect consumers, however, the Board can and does bring public enforcement actions.

The two previously mentioned referrals involving mortgage-pricing discrimination resulted from a process of targeted pricing reviews that the Federal Reserve initiated when Home Mortgage Disclosure Act (HMDA) pricing data first became available in 2005. Board staff developed--and continues to refine--HMDA screens that identify institutions that may warrant further review on the basis of an analysis of HMDA pricing data. Because HMDA data lack many of the factors lenders routinely use to make credit decisions and set loan prices, such as information about a borrower's creditworthiness and loan-to-value ratios, HMDA data alone cannot be used to determine whether a lender discriminates. Thus, Board staff analyze HMDA data in conjunction with other supervisory information to evaluate a lender's risk for engaging in discrimination.

Using 2008 HMDA pricing data--the most recent year for which the data are publicly available--Federal Reserve examiners performed a pricing discrimination risk assessment for each institution that was identified through the HMDA screening process. These risk assessments incorporated not just the institution's HMDA data but also the strength of the institution's fair lending compliance program; past supervisory experience with the institution; consumer complaints against the institution; and the presence of fair lending risk factors, such as discretionary pricing. On the basis of these comprehensive assessments, Federal Reserve staff determined which institutions would receive a targeted pricing review. Depending on the examination schedule, the targeted pricing review could occur as part of the institution's next examination or outside the usual supervisory cycle.

Analyzing HMDA Data

Enacted by Congress in 1975, the Home Mortgage Disclosure Act (HMDA) requires most mortgage lenders located in metropolitan areas to collect data about their housing-related lending activity, report the data annually to the federal government, and make the data publicly available. Data reporting requirements have expanded in recent years to capture reporting lenders' pricing information for higher-priced consumer mortgage loans.

An article published in September 2009 by Federal Reserve staff in the Federal Reserve Bulletin uses 2008 HMDA data to describe the market for higher-priced loans and patterns of lending across loan products, borrowers, and neighborhoods of different races and incomes.1 The analysis documents the sharp contraction in total home lending between 2007 and 2008 (about 31 percent), led by a steep reduction in conventional lending. The analysis also provides a detailed assessment of the dramatic growth between 2007 and 2008 in home lending backed by the Federal Housing Administration's (FHA) mortgage insurance program.

As in recent years, the 2008 HMDA data show that most reporting institutions originated few if any higher-priced loans in 2008: 53 percent of the lenders originated less than 10 higher-priced loans that year and 30 percent originated no higher-priced loans. Of the 8,388 home lenders reporting HMDA data, 947 made 100 or more higher-priced loans.

The HMDA data also show that the majority of all loan originations were not higher priced; in fact, owing in large part to the mortgage market turmoil that first showed signs of emerging in late 2006, the incidence of higher-priced lending fell from a high watermark of 29 percent in 2006 to 18 percent in 2007 and to 12 percent in 2008.

Overall, the incidence of higher-priced lending fell notably because lenders were unwilling or unable to extend credit to borrowers perceived to entail higher risk. Also, the incidence of higher-priced lending in 2008 was affected by the general "flight to quality" that tended to increase loan prices relative to the yield on Treasury securities and cause some loans to fall above the price reporting threshold even though those same loans would not have crossed the threshold prior to the financial market turmoil.

The HMDA data show that the incidence of higher-price lending varies by product type: higher-risk loans, such as those for manufactured homes, show the greatest incidence of higher-priced lending (in 2008 more than two-thirds of these loans are higher priced); lower-risk loans, such as those for first-lien mortgages and junior-lien loans, have a much lower incidence of higher-priced lending. Only seven percent of first-lien conventional home purchase loans and 11 percent of comparable junior-lien loans were reported as higher-priced in 2008.

Also, the data indicate that the incidence of higher-priced lending varies greatly among borrowers of different races and ethnicities. In 2008, 17.1 percent of African-American borrowers and 15.4 percent of Hispanic borrowers received higher-priced first-lien conventional home purchase loans, compared with 6.5 percent of non-Hispanic white and 3.3 percent of Asian borrowers. A similar pattern is found among government-backed loans (those insured by the FHA or guaranteed by the Department of Veterans Affairs), but the differences across racial and ethnic groups are much smaller.

Even if an institution is not identified through HMDA screening, examiners might still conclude that the institution is at risk for engaging in pricing discrimination and perform a pricing review. The Federal Reserve supervises many institutions that are not required to report data under HMDA. Also, many of the HMDA-reporting institutions supervised by the Federal Reserve originate few higher-priced loans and, therefore, report very little pricing data. For these institutions, examiners analyze other available information to assess pricing-discrimination risk and, when appropriate, perform a pricing review. During a targeted pricing review, staff analyze additional information, including potential pricing factors that are not available in the HMDA data, to determine whether any pricing disparity by race or ethnicity is fully attributable to legitimate factors, or whether any portion of the pricing disparity may be attributable to illegal discrimination.

Monitoring Emerging Fair Lending Issues

During the past year, economic conditions have shown signs of improvement; however, certain trends in credit markets continue to pose fair lending risk, especially related to credit tightening and loan modification activities. Lenders remain cautious and continue to reevaluate their lending practices. Some policies to tighten credit standards may fall disproportionately on minorities and raise fair lending concerns. For example, some lenders have implemented tighter credit standards in specific geographic markets, or have otherwise limited lending activity in certain geographic areas. In addition, the rapid increase of loan modifications and other loss mitigation efforts threatens to outpace compliance management programs.

Flood Insurance

The National Flood Insurance Act imposes certain requirements on loans secured by buildings or mobile homes located in, or to be located in, areas determined to have special flood hazards. Under the Federal Reserve's Regulation H, which implements the act, state member banks are generally prohibited from making, extending, increasing, or renewing any such loan unless the building or mobile home and any personal property securing the loan are covered by flood insurance for the term of the loan. The law requires the Board and other federal financial institution regulatory agencies to impose civil money penalties when they find a pattern or practice of violations of the regulation. The civil money penalties are payable to the Federal Emergency Management Agency (FEMA) for deposit into the National Flood Mitigation Fund.

During 2009, the Board imposed civil money penalties (CMPs) against seven state member banks. The dollar amount of the penalties, which were assessed via consent orders, totaled $221,205.

Coordination with Other Federal Banking Agencies

The member agencies of the FFIEC develop uniform examination principles, standards, procedures, and report formats. In 2009, the FFIEC issued the following work products:

Interagency Examination Procedures for the Servicemembers Civil Relief Act (SCRA) - The procedures are used to determine institution compliance with SCRA, including provisions related to interest rate reduction to six percent for active duty servicemembers, foreclosure protection, and protection of servicemembers' rights with regard to suspension of life insurance premiums, taxes, and business obligations.18

Interagency Questions and Answers Regarding Flood Insurance - The questions and answers supersede the 1997 questions and answers document, and it supplements other recent guidance and interpretations issued by the agencies and FEMA.19

Interagency Examination Procedures for Regulation Z (revised) - The revised examination procedures incorporate the 2008 amendments to Regulation Z. The amendments were designed to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices. Among other things, the changes apply protections to a newly defined category of "higher-priced mortgages" that includes virtually all closed-end subprime loans secured by a consumer's principal dwelling.21

Interagency Examination Procedures for the Home Mortgage Disclosure Act (revised) - The revised examination procedures incorporate the 2008 amendments to Regulation C for reporting pricing information on higher-priced loans. The changes to Regulation C conformed the threshold for rate spread reporting to the definition of "higher-priced mortgage loans" included in 2008 amendments to Regulation Z.22

Interagency Examination Procedures for the Real Estate Settlement Procedures Act (RESPA) (revised) - The revised examination procedures incorporate the changes to RESPA that HUD issued in its 2008 final RESPA reform rule (73 F.R. 68204), which included both technical and substantive changes to its Regulation X. The key technical changes provide streamlined mortgage servicing disclosure language, eliminate outdated escrow account provisions regarding the phase-in period, and permit an "average charge" to be listed on the Good Faith Estimate (GFE) and HUD-1/1A Settlement Statement. The key substantive changes include implementation of a standardized and binding GFE form and revised HUD-1/1A Settlement Statement.23

Interagency Examination Procedures for Regulation DD (revised) - The revised examination procedures incorporate changes to Regulation DD that address depository institutions' disclosure practices related to overdrafts. The changes require institutions to disclose the aggregate dollar amounts charged for overdraft fees and returned item fees on a periodic statement and, for institutions that provide account balance information through an automated system, to provide a balance that does not include additional funds that may be made available to cover overdrafts.24

Training for Bank Examiners

Ensuring that financial institutions comply with laws that protect consumers and encourage community reinvestment is an important part of the bank examination and supervision process. As the number and complexity of consumer financial transactions grow, training for the examiners who review the organizations under the Federal Reserve's supervisory responsibility becomes even more important.

The consumer compliance examiner training curriculum consists of six courses focused on various consumer protection laws, regulations, and examination concepts. In 2009, the Board held 11 training sessions for 158 System consumer compliance examiners and professional staff, 25 state examiners, and one examiner from another regulatory agency. Several courses use a combination of instructional methods: (1) specially developed computer-based instruction that includes interactive self-check exercises, and (2) classroom instruction focused on case studies.

Board and Reserve Bank staff members are charged with providing updates to the System's content mapping initiative. This mapping tool, which provides a detailed view of training content in each and every System course, allows staff to more quickly identify and revise course materials that may be affected by regulatory, legal, or other changes. This year, FedLearn skill level definitions were identified for each training objective for consumer compliance courses and were included in the content map.

In addition to providing core training for non-commissioned assistant examiners, the examiner curriculum emphasizes the importance of continuing professional development for all examiners. Opportunities for continuing development include special projects and assignments, self-study programs, rotational assignments, the opportunity to instruct at System schools, mentoring programs, and an annual senior examiner forum. For example, in response to an ever-changing regulatory environment, System staff conducted two real estate workshops for experienced examination staff. The focus of the workshops was the new and revised mortgage rules and the RESPA reform. In addition, in 2009 the System continued to offer Rapid Response sessions, a mass-training effort using multi-media to deliver training, focusing on 12 time-sensitive or emerging consumer compliance topics. These sessions were designed, developed, and presented to System staff within days or weeks of perceived need.

Agency Reports on Compliance with Consumer Protection Laws

The Board reports annually on compliance with consumer protection laws by entities supervised by federal agencies. This section summarizes data collected from the 12 Federal Reserve Banks, the FFIEC member agencies, and other federal enforcement agencies.25

Regulation B (Equal Credit Opportunity)

The FFIEC agencies reported that approximately 81 percent of the institutions examined during the 2009 reporting period were in compliance with Regulation B, compared with 85 percent for the 2008 reporting period. The most frequently cited violations involved

failure to provide notice of approval, counteroffer, or adverse action within 30 days after receiving a completed credit application;

failure to provide a written notice of denial or other adverse action to a credit applicant, containing the specific reason for the adverse action, along with other required information;

failure to collect information about applicants seeking credit primarily for the purchase or refinancing of a principal residence, including applicants' race, ethnicity, sex, marital status, and age, for government monitoring purposes; and

improperly collecting information on applicants' race, color, religion, national origin, or sex when not permitted by the regulation.

The Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) each initiated one formal Regulation B-related public enforcement action during the reporting period, while the Federal Deposit Insurance Corporation (FDIC) initiated 13.26 There were no other enforcement actions by FFIEC agencies. The Federal Trade Commission (FTC) filed a complaint against a mortgage company alleging that it violated Regulation B (and the FTC Act).

The other agencies that enforce the ECOA--the Farm Credit Administration (FCA), the Department of Transportation (DOT), the Securities and Exchange Commission (SEC), the Small Business Administration, and the Grain Inspection, Packers and Stockyards Administration of the Department of Agriculture--reported substantial compliance among the entities they supervise. The FCA's examination activities revealed that most Regulation B violations involved either: (1) creditors' failure to request or provide information for government monitoring purposes or (2) creditors providing inadequate statements of specific reasons for adverse actions. None of these agencies initiated formal enforcement actions relating to Regulation B during the reporting period.

Regulation E (Electronic Fund Transfers)

The FFIEC agencies reported that approximately 94 percent of the institutions examined during the 2009 reporting period were in compliance with Regulation E, which is comparable with the 2008 reporting period. The most frequently cited violations involved failure to

investigate and determine whether an error occurred and provide the results to the consumer within 10 business days of receiving a notice of error from a consumer;

provisionally credit the consumer's account for the amount of an alleged error when an investigation into the alleged error cannot be completed within 10 business days;

provide initial disclosures that contain required information, including limitations on the types of transfers permitted and error-resolution procedures, at the time a consumer contracts for an electronic fund transfer service; and

provide a written explanation to the consumer when an investigation determines that no error or a different error has occurred.

The OCC initiated one formal Regulation E-related enforcement action during the reporting period, while the FDIC initiated five. There were no other enforcement actions by FFIEC agencies or the SEC. The FTC filed three actions against companies for violating Regulation E and settled two cases brought in 2008.

Regulation M (Consumer Leasing)

The FFIEC agencies reported that 100 percent of the institutions examined during the 2009 reporting period were in compliance with Regulation M, compared with 99 percent for the 2008 reporting period. The FFIEC agencies did not issue any public enforcement actions specific to Regulation M during the period.

Regulation P (Privacy of Consumer Financial Information)

The FFIEC agencies reported that approximately 98 percent of the institutions examined during the 2009 reporting period were in compliance with Regulation P, compared with 97 percent for the 2008 reporting period. The most frequently cited violations involved failure to

provide a clear and conspicuous initial privacy notice to customers;

provide customers with a clear and conspicuous annual notice reflecting the institution's privacy policies and practices; and

The OCC initiated one formal Regulation P-related enforcement action during the reporting period, while the FDIC initiated five.27 There were no other enforcement actions by FFIEC agencies.

Regulation Z (Truth in Lending)

The FFIEC agencies reported that 92 percent of the institutions examined during the 2009 reporting period were in compliance with Regulation Z, compared with 81 percent for the 2008 reporting period. The most frequently cited violations involved

failure to accurately disclose the APR in a closed-end credit transaction;

failure to disclose the fact that a creditor has or will acquire an interest in a property purchased as part of a transaction; and

on certain residential mortgage transactions, failure to provide a good faith estimate of the required disclosures before consummation, or not later than three business days after receipt of a written loan application.

In addition, 182 banks supervised by the Federal Reserve, FDIC, OCC, and OTS were required, under the Interagency Enforcement Policy in Regulation Z, to reimburse a total of approximately $3.14 million to consumers for understating APRs or finance charges in their consumer loan disclosures.

The OTS and the OCC each initiated one formal Regulation Z-related enforcement action during the reporting period, while the FDIC had 12. There were no other enforcement actions by FFIEC agencies. The DOT continued to prosecute one air carrier for its alleged improper handling of credit card refund requests and other Federal Aviation Act violations. The FTC filed two settlements and issued three consent orders involving alleged violations of Regulation Z.

Regulation AA (Unfair or Deceptive Acts or Practices)

The FFIEC agencies reported that more than 99 percent of the institutions examined during the 2009 reporting period were in compliance with Regulation AA, which is comparable with the 2008 reporting period. The OTS initiated three formal Regulation AA-related enforcement actions, the OCC initiated one, and the FDIC initiated six during the reporting period. There were no other enforcement actions by FFIEC agencies.

Regulation CC (Availability of Funds and Collection of Checks)

The FFIEC agencies reported that 90 percent of institutions examined during the 2009 reporting period were in compliance with Regulation CC, compared with 89 percent for the 2008 reporting period. The most frequently cited violations involved failure to

make available on the next business day the lesser of $100 or the aggregate amount of checks deposited that are not subject to next-day availability;

follow procedures when invoking the exception for large-dollar deposits;

provide required information when placing an exception hold on an account; and

make funds deposited from local and certain other checks available for withdrawal within the times prescribed by the regulation.

The OCC initiated four formal Regulation CC-related enforcement actions during the reporting period, while the FDIC initiated six. There were no other enforcement actions by FFIEC agencies.

Regulation DD (Truth in Savings)

The FFIEC agencies reported that 87 percent of institutions examined during the 2009 reporting period were in compliance with Regulation DD, compared with 86 percent for the 2008 reporting period. The most frequently cited violations involved

inappropriate use of the phrase "annual percentage yield" in an advertisement without providing required additional terms and conditions;

failure to provide account disclosures clearly and conspicuously, in writing, and in a form that the consumer may keep; and

failure to provide timely, subsequent disclosures before maturity of time accounts.

The OTS and the OCC each initiated one formal Regulation DD-related enforcement action during the reporting period, while the FDIC initiated nine. There were no other enforcement actions by FFIEC agencies.

Responding to Consumer Complaints and Inquiries

The Federal Reserve investigates complaints against state member banks and selected nonbank subsidiaries of bank holding companies, and forwards complaints against other creditors and businesses to the appropriate enforcement agency.28 Each Reserve Bank investigates complaints against state member banks and selected nonbank subsidiaries in its District. The Federal Reserve also responds to consumer inquiries on a broad range of banking topics, including consumer protection questions.

In late 2007, the Federal Reserve established Federal Reserve Consumer Help (FRCH) to centralize the processing of consumer complaints and inquiries. In 2009, its second full year of operation, FRCH processed 53,904 cases. Of these cases, half (26,979) were inquiries and half (26,925) were complaints, with most cases received directly from consumers. Approximately three percent of cases were referred from other agencies.

While consumers can contact FRCH by telephone, fax, mail, e-mail, or online, most FRCH consumer contacts occurred by telephone (78 percent). Nevertheless, 40 percent (10,643) of complaint submissions were made online, and the online form page received nearly 395,000 visits during the year.

Complaints against State Member Banks and Selected Nonbank Subsidiaries of Bank Holding Companies about Regulated Practices, by Regulation/Act, 2009

Regulation/Act

Number

Regulation AA (Unfair or Deceptive Acts or Practices)

82

Regulation B (Equal Credit Opportunity)

49

Regulation BB (Community Reinvestment)

2

Regulation C (Home Mortgage Disclosure)

4

Regulation CC (Expedited Funds Availability)

265

Regulation D (Reserve Requirements)

8

Regulation DD (Truth in Savings)

283

Regulation E (Electronic Funds Transfers)

142

Regulation G (Disclosure / Reporting of CRA-Related Agreements)

1

Regulation H (National Flood Insurance Act / Insurance Sales)

13

Regulation M (Consumer Lending)

2

Regulation P (Privacy of Consumer Financial Information)

35

Regulation Q (Payment of Interest)

7

Regulation V (Fair and Accurate Credit Transactions)

6

Regulation Z (Truth in Lending)

508

Fair Credit Reporting Act

83

Fair Debt Collection Practices Act

52

Fair Housing Act

1

Home Ownership Counseling

1

HOPA (Homeowners Protection Act)

3

Real Estate Settlement Procedures Act

80

Right to Financial Privacy Act

11

Total

1,638

Consumer Complaints

Complaints against state member banks and selected nonbank subsidiaries of bank holding companies totaled 8,073 in 2009. Nearly 40 percent (3,151) of these complaints were closed without investigation pending the receipt of additional information from consumers. Of the remaining complaints, 67 percent (3,284) involved unregulated practices and 33 percent (1,638) involved regulated practices.

Complaints against State Member Banks and Selected Nonbank Subsidiaries of Bank Holding Companies about Regulated Practices, by Product Type, 2009

Thirty-one regulated complaints alleging discrimination were received. Of these, 18 complaints (one percent of total regulated complaints) alleged discrimination on the basis of prohibited borrower traits or rights.30 Fifty percent of discrimination complaints were related to the age of the applicant or borrower. Thirty-three percent of discrimination complaints were related to the race, color, national origin, or ethnicity of the applicant or borrower. The most common violations where discrimination was alleged involved real estate loans and other loans.

In 75 percent of investigated complaints against state member banks and selected nonbank subsidiaries of bank holding companies, evidence revealed that banks or subsidiaries correctly handled the situation. Of the remaining 25 percent, ten percent are open cases that are in process, 5 percent were deemed violations of law, one percent was regarding general errors, and the remainder primarily involved factual disputes or litigated matters. The most common violations involved checking accounts, real estate loans, and credit cards.

Complaints About Unregulated Practices

As required by Section 18(f) of the Federal Trade Commission Act, the Board continued to monitor complaints about banking practices not subject to existing regulations, with a focus on instances of potential unfair or deceptive practices. In 2009, the Board received 3,304 complaints against state member banks and selected nonbank subsidiaries of bank holding companies that involved these unregulated practices. Most complaints were related to checking account activity (35 percent), real estate concerns (25 percent), and credit cards (9 percent). More specifically, consumers most frequently complained about issues involving insufficient funds or overdraft charges and procedures; credit card interest rates, terms, and fees; debt collection/foreclosures; depository forgery, fraud, embezzlement, or theft; and opening and closing deposit accounts.

Complaint Referrals

In 2009, the Federal Reserve forwarded 18,360 complaints against other banks and creditors to the appropriate regulatory agencies and government offices for investigation. To minimize the time required to re-route complaints to these agencies, referrals were transmitted electronically.

The Federal Reserve forwarded eight complaints to the Department of Housing and Urban Development (HUD) that alleged violations of the Fair Housing Act.31 The Federal Reserve's investigation of these complaints revealed no evidence of illegal credit discrimination.

Consumer Inquiries

The Federal Reserve received 26,979 consumer inquiries in 2009, covering a wide range of topics. The top three consumer protection issues documented with specific codes were: adverse action notices received pursuant to the Equal Credit Opportunity Act (11 percent); pre-approved credit solicitations (7 percent); and depository forgery, fraud, embezzlement or theft (3 percent). Consumers were typically directed to other resources, including other federal agencies or written materials, to address their inquiries.

Supporting Community Economic Development

The Board's Division of Consumer and Community Affairs (DCCA) works to promote community economic development and fair access to credit for low- and moderate-income communities and populations. As a decentralized function, the Community Affairs Offices (CAOs) at each of the 12 Reserve Banks design activities to respond to the specific needs of the communities they serve, with oversight from Board staff. The CAOs provide information and promote awareness of investment opportunities to financial institutions, government agencies, and organizations that serve low- and moderate-income communities and populations. Similarly, the Board's CAO promotes and coordinates Systemwide, high-priority efforts; in particular, Board community affairs staff focus on issues that have public policy implications.

Foreclosures and Neighborhood Stabilization

In 2009, issues related to high rates of foreclosure continued to dominate the System's community affairs agenda. While each Reserve Bank addressed the impact of foreclosure on low- and moderate-income communities--through programming tailored to the particular needs of communities in their Districts--the entire System coordinated resources, knowledge, and expertise related to mortgage markets to address the foreclosure problem through the Mortgage Outreach and Research Efforts (MORE) Initiative.32

The MORE initiative aims to enhance the System's response to the foreclosure crisis by improving understanding of the incidents and underlying causes of foreclosures, working to mitigate the impact of foreclosures on individual borrowers and communities, and enhancing the System's communication of important research and policy findings to consumers, financial institutions, community development practitioners, state and local governments, and federal policymakers.

As part of the MORE initiative, for example, the System is conducting a study of the uses of funds distributed under the Neighborhood Stabilization Program (NSP), which was established by HUD to stabilize communities that have suffered from foreclosures and abandonment. In 2009, the System solicited input from various local stakeholders, which will serve as the foundation of a report to be issued in the spring of 2010 to describe the uses of NSP funds and to identify best practices for future funding expenditures. In addition, the Board worked with the Federal Reserve Banks of Boston and Cleveland on a publication addressing issues related to the acquisition and disposition of real estate owned (REO), a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. In addition, the System's Foreclosure Toolkit, a web-based resource center for borrowers, housing counselors, and community development practitioners, was updated to provide links to new information on outreach programs and to allow for further customization at the District-level.

The Board also partnered with NeighborWorks America® (NWA) again in 2009 to continue to leverage the System's resources with those of the NWA network to address community stabilization in the wake of the record number of foreclosures.33 As part of the partnership, the Board co-sponsored the Neighborhood Stabilization Symposium, a featured program at NWA's December 2009 Training Institute in Washington, D.C. Federal Reserve Board Governor Elizabeth Duke delivered opening remarks at the symposium, which featured discussions and presentations of strategies and best practices in neighborhood stabilization.34 The symposium attracted an audience of approximately 400 local practitioners and policymakers.

CRA Did Not Cause the Subprime Mortgage Crisis

As the recent financial crisis unfolded, many theories emerged about its underlying causes, including some claims that the Community Reinvestment Act (CRA) encouraged commercial banks and savings institutions (banking institutions) to undertake high-risk mortgage lending.

The Board rebuts claims that the CRA lies at the root of the crisis by making the following points.

The language and enforcement of the CRA do not portend excessively risky lending by banks.

The CRA encourages banking institutions to extend credit to low- and moderate-income (LMI) neighborhoods and households within the framework of safe and sound operation. Moreover, the CRA does not stipulate minimum targets or even goals for the volume of loans, services, or investments banking institutions must provide. Finally, while subprime mortgage lending grew most significantly in the early to mid 2000's, the CRA rules and enforcement process have not changed substantively since 1995. These three considerations weaken the theoretical link between the CRA and the subprime mortgage boom and bust.

Only a small portion of subprime mortgage originations in 2005 and 2006 can reasonably be linked to the CRA.

Data collected under the Home Mortgage Disclosure Act in 2005 and 2006 also suggest a tenuous link between the CRA and subprime mortgage lending. First, institutions not covered by the CRA (independent nonbank institutions) accounted for about half of all higher- priced mortgage originations (a proxy for subprime originations). Second, about 60 percent of higher-priced originations went to middle- or higher-income borrowers or neighborhoods, populations not targeted by the CRA. Finally, and perhaps most tellingly, only six percent of all higher-priced mortgage originations were extended by CRA-regulated lenders (and their affiliates) to either lower-income borrowers or neighborhoods in the lenders' CRA assessment areas (the geographies that are the focus of CRA evaluations).

Mortgage defaults and foreclosures have been severe even in middle- and higher-income neighborhoods, areas that are not the focus of the CRA.

Analysis of data on non-prime mortgages (subprime and near-prime loans) from First American LoanPerformance (LP) finds that the 90-days-or-more delinquency rate (as of August 2008) for loans originated between January 2006 and April 2008 is very high across geographies regardless of income. Similarly, data from RealtyTrac on foreclosure filings between January 2006 and August 2008 indicate that about 70 percent of filings have taken place in middle- or higher-income neighborhoods, and filings have increased more sharply in middle- or higher-income areas than in the lower-income areas targeted by the CRA. It is important to note, however, that the LP and RealtyTrac data do not identify borrower income, tempering the conclusions one can draw from these data.

In 2009, the Board also hosted a series of forums to address the availability of affordable rental housing. Topics addressed in the series included the particular problems of tenants that rent properties from owners in foreclosure, strategies for managing scattered site properties, policies designed to create rental property from REO inventories, financing of small multifamily properties, and strategies for reviving the market for Low Income Housing Tax Credits (LIHTCs). The Federal Reserve Bank of St. Louis partnered with the Board for the LIHTC forum and published a collection of policy papers featured at the forum.35

Other Community Development Initiatives

Beyond foreclosure and neighborhood stabilization issues, DCCA provided important policy leadership in several areas in 2009. The Federal Reserve Banks of Boston and San Francisco published Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, a compendium of policy recommendations regarding the modernization of the Community Reinvestment Act. The Boston and San Francisco Banks, together with the Board, co-hosted a policy discussion that introduced the publication and attracted leaders from the financial services industry, community advocates, foundations, think tanks, and academic institutions.

In addition, the Federal Reserve Bank of San Francisco partnered with the Board and the Community Development Financial Institutions Fund to host a Community Development Finance Summit in Washington, D.C. The summit brought together leaders in community development finance and featured a robust discussion of strategies to respond to the economic crisis. The San Francisco Bank's Center for Community Development Finance published materials that served as the basis for the discussion entitled The Economic Crisis and Community Development Finance: An Industry Assessment.36 The Federal Reserve Bank of Boston also partnered with the Board and the Aspen Institute to follow-up on a System initiative begun in 2004 to address the scale and sustainability ofcommunity organizations by hosting a forum on subsidies in community development.

Consumer Education and Outreach: Meeting Consumers Where They Are

In today's complex and ever-changing consumer financial services marketplace, it is critical that consumers know where they can go for reliable information to assist them in making financial choices, and be able to spot a scam or a deal that is "too good to be true." The Federal Reserve has a wealth of unbiased, research-based consumer information, and, throughout the year, DCCA engaged in innovative ways to expand its outreach to connect consumers with these resources.

In 2009, high foreclosure rates gave rise to concerns about new risks for vulnerable consumers in the mortgage marketplace. With concern about an increase in foreclosure-related scams, the Board was among the first federal banking agencies to reach out to consumers to warn them. Board staff conducted research to determine the most effective strategy for delivering short information pieces to the greatest number of people. Data indicates that consumers go to the movies even in a down economy, so the Board began running ads in movie theaters in April that focused on helping consumers avoid foreclosure scams:

"Having trouble keeping up with your mortgage payments? Are you facing foreclosure? Don't be taken advantage of--it shouldn't hurt to get help. Go to FederalReserve.gov and click on 5 Tips for Avoiding Foreclosure Scams."

Messages on avoiding foreclosure and scams were later expanded, with ads running in theaters over Labor Day weekend.

The Board also alerted consumers to changes in laws and regulations that have increased consumer credit card protections. With sweeping new rules being implemented in 2009 and 2010 (see "Credit Card Reform" in this chapter), the Board wanted consumers to have information about their accounts and rights, so it ran additional movie ads over Thanksgiving weekend to encourage wise credit card usage, directing viewers to 5 Tips for Getting the Most from Your Credit Card."1

The Board also took steps to expand its Internet presence in order to provide consumers with easier access to information. In 2009, the Board began developing an interactive, user-friendly website that focused on new credit card rules released in early 2010.2 The Board developed a similar consumer education webpage on new rules for overdraft protection products.3

DCCA developed other new, web-based consumer resources and updated existing materials. In the spring of 2009, a new interactive Credit Card Repayment Calculator was added to the Federal Reserve's website.4 The calculator helps consumers estimate how long it will take to pay their credit card bills under different payment scenarios. This new tool complements other interactive calculators on the website, including calculators that focus on mortgages and mortgage refinancing. DCCA also expanded its popular 5 Tips series, with new information on shopping for a mortgage.5

The Board is also accessible to consumers through Federal Reserve Consumer Help (FRCH), a consumer complaint website.6 This site includes information about bank products and services and consumers' rights, as well as links to other useful websites that provide information about recognizing and reporting scams. In fact, nearly 100 scams were reported through FRCH in 2009 and were sent to the appropriate federal authorities for investigation and prosecution.

In April, the System held the sixth biennial System Community Affairs Officer's Research Conference.37 The conference, entitled Innovative Financial Services for the Underserved: Opportunities and Outcomes, explored the role, processes, and outcomes of inno-vation in financial services for low- and moderate-income consumers and underserved populations. Leading researchers presented original and objective research designed to inform innovative market and product development through a framework that addressed (1) individual consumer preferences and behaviors with respect to consumer finance products, (2) influences affecting market participation, such as financial education and institutional structures, (3) effects of mortgage products on performance and wealth creation, and (4) approaches for shaping market participation.

Meeting Data and Analysis Needs

The Federal Reserve made a concerted effort to address the data needs of community development practitioners in 2009. The Federal Reserve Bank of Philadelphia hosted a conference in June entitled Understanding the Housing and Mortgage Markets: What Data Do We Have? What Data Do We Need?38 The conference brought together researchers and government offi-cials responsible for data collection to discuss existing data available from federal, state, and local sources to monitor economic and housing conditions in low- and moderate-income neighborhoods, as well as the limitations of the data and efforts to improve the quality and availability of data to address community development needs.

In addition, several Reserve Banks developed survey instruments to monitor economic conditions in low- and moderate-income communities. For example, the Federal Reserve Bank of Kansas City developed the LMI Survey, a quarterly survey that measures the economic conditions of low- and moderate-income communities and the organizations that serve them.39 The survey results are used to construct five indicators of economic conditions in low- and moderate-income communities and two indicators of the condition of organizations serving them. The LMI Survey is available on the Reserve Bank's website and provides a gauge for service providers, policymakers, and others to evaluate and respond to changes in the economic conditions for low- and moderate-income individuals.

Consumer Advisory Council

The Board's Consumer Advisory Council (the Council)--whose members represent consumer and community organizations, the financial services industry, academic institutions, and state agencies--advises the Board of Governors on matters of Board-administered laws and regulations as well as other consumer-related financial services issues. Council meetings, open to the public, were held in March, June, and October. For a list of members of the Council, see the "Federal Reserve System Organization" section in this report; also, visit the Board's website for transcripts of Council meetings.40

Among the significant topics of discussion for the Council in 2009 were

proposed changes to Regulation Z regarding disclosures that consumers receive in connection with closed-end mortgages and home-equity lines of credit and amendments that would provide new consumer protections for home-secured credit;

proposed rules regarding overdraft services;

issues related to foreclosures; and

strategies and challenges related to neighborhood stabilization.

The Credit Card Act

In the June and October meetings, the Council addressed certain provisions of the Credit Card Act amending the Truth in Lending Act (TILA) and proposed amendments to Regulation Z (Truth in Lending) to protect consumers who use credit cards from a number of potentially costly practices (see "Credit Card Reform").

The Credit Card Act prohibits creditors from opening a new credit card account or increasing the credit limit for an existing account unless the creditor considers the consumer's ability to make the required payments under the terms of the account. Industry representatives encouraged the Board to adopt a broad, flexible approach regarding issuers' evaluation of a consumer's ability to pay, stating that issuers should be permitted to use an array of factors in underwriting, including generic and custom credit scores as well as institutions' internal information that is statistically derived from their portfolios. Consumer representatives expressed concern about the ability of regulators to review and validate issuers' underwriting models and methodologies due to their proprietary nature and about the use of credit scores for underwriting rather than a holistic assessment of consumers' ability to repay their full potential indebtedness.

In response to the Board's proposed rules to implement the ability-to-pay provision, industry members expressed support for the proposed rule requiring consideration of existing obligations as well as income or assets in assessing consumers' ability to make the required minimum payments, but noted the challenge in obtaining income information for existing customers. They encouraged the Board to include payment history as an additional factor in the ability-to-pay analysis and to permit use of modeled income, based on empirically derived and statistically sound models, as a substitute for reported income. Consumer representatives cautioned that regulators should closely monitor such modeling. Industry representatives also supported the proposed rule requiring issuers to estimate minimum payments based on a consumer's utilization of the full credit line, but encouraged the Board to clarify that the analysis would take into account only the credit line offered by the particular issuer, not the full utilization of a consumer's other credit lines. A consumer representative expressed the view that issuers should consider the full utilization of all credit lines in determining ability to pay.

Regarding penalty fees associated with credit card accounts, consumer representatives expressed the view that any fees should be reasonably related to the cost incurred by the creditor as a result of the violation, as verified by empirical data; that basing fees on deterrence should also be supported empirically; and that the overall standards for penalty fees should be subject to rigorous validation. Industry representatives supported the adoption of a flexible set of criteria to consider in determining the reasonableness and proportionality of penalty fees and encouraged the inclusion of portfolio-based analysis and issuers' loss rates as factors in addition to those specifically listed in the statute.

For over-the-limit fees, consumer representatives urged the Board to ensure that issuers provide appropriate disclosures regarding the opt-in requirement for extensions of credit that exceed the account's credit limit and to require that consumers who do not opt in nevertheless receive the same account terms, conditions, and features provided to consumers who do opt in. A consumer representative encouraged the Board to prohibit the assessment of over-the-limit fees due to credit-line reductions. An industry representative stated that the opt-in requirement for the over-the-limit feature will help to regulate the reasonableness of that fee. A consumer representative expressed the view that the opt-in requirement for over-the-limit transactions and fees will foster consumer choice and competition in the marketplace, but urged regulators to monitor the ways in which issuers communicate the change to consumers. Industry representatives encouraged the Board to allow issuers to begin informing consumers in advance of the requirement's February 22, 2010, implementation date that creditors obtain a consumer's express consent before imposing over-the-limit fees.

Regarding the statutory requirement that issuers reevaluate interest rate increases that are based on the credit risk of the consumer, market conditions, or other factors, industry representatives encouraged the Board to adopt a broad set of criteria for issuers to consider in making such decisions. Consumer representatives expressed the view that issuers' rate-setting and repricing methodologies should be subject to rigorous scrutiny and validation by regulators.

Industry representatives generally pointed to the emergence of a new business model in the credit card industry as issuers adjust to the elimination of "back-end" risk-management tools such as repricing and turn to more stringent "front-end" underwriting and overall higher pricing.

Overdraft Services

At the March meeting, Council members discussed the Board's proposed amendments to Regulation E (Electronic Fund Transfer Act), which would provide consumers with certain choices relating to the use of overdraft services and the assessment of overdraft fees (see "Overdraft Services and Gift Card Rules"). The proposed rules would prohibit financial institutions from imposing a fee on a consumer's asset account for paying an overdraft for an ATM or one-time debit card transaction unless the consumer is given notice of the right to opt out of the institution's overdraft service, and the consumer does not opt out. As an alternative approach, the proposal would require a consumer's affirmative consent, or opt-in, before such overdrafts could be paid by the financial institution and a fee imposed on the consumer's account for the service.

Members commended the Board for its work on the proposed overdraft rules and incorporation of feedback from the Council in prior meetings. Several industry representatives ex-pressed support for the opt-out approach, which they stated would allow consumers to retain control of their financial situation while averting potential operational disruptions at the point of sale and alleviating the burden on institutions to gain affirmative consent from existing account-holders. One member suggested that the Board adopt an opt-out approach for current accounts and an opt-in approach for new accounts as of a certain date. Industry representatives also supported the idea that financial institutions should be permitted to price differently those accounts that do not allow overdrafts for ATM withdrawals and one-time debit transactions, compared to accounts that allow the payment of such overdrafts.

A consumer representative stated that surveys show that consumers want a choice about whether overdrafts are paid for debit-card transactions and that consumers generally want the transaction to be declined. Consumer representatives generally supported the opt-in approach, which they stated would provide incentives for institutions to communicate clearly about overdraft services to their customers. They also expressed the view that institutions should not be permitted to alter the account terms, conditions, or features for consumers who do not opt in compared to those who do opt in. According to one consumer representative, if banks change their business models to move away from free checking accounts, any account fee should be uniform and applied to all account-holders. One member also urged the Board to adopt substantive protections regarding overdraft services, such as limiting the number of overdrafts a consumer could be charged for during a year.

Closed-End Mortgages and Home Equity Lines of Credit

In July 2009, the Board proposed changes to the disclosures that consumers receive in connection with closed-end mortgage loans and home equity lines of credit (HELOCs) with the goal of improving their content and format to make them more useful to consumers (see "Mortgage and Home Equity Lending Reform"). These disclosures are required by the Board's Regulation Z. Many of the changes are based on the consumer testing conducted in connection with the review of Regulation Z. Council members strongly commended the Board's work on the disclosures and the use of extensive consumer testing to inform the content and format of the disclosures. Several members urged the Board to do further testing regarding consumers' experiences with mortgage transactions.

For closed-end mortgages, the Board's proposal would revise the calculation of the finance charge and annual percentage rate (APR) so that they better capture most fees and costs paid by consumers in connection with the loan. Several industry representatives cautioned against including additional fees, such as third-party charges, in the APR because such a calculation could mean that more loans will exceed the high-cost threshold under federal and state laws. A consumer representative supported including all fees in the APR to make it a more useful number for consumers and suggested that fees should be amortized over a typical refinancing period or the actual term of the loan, whichever is shorter.

The Board's proposal would require the creditor to provide a "final" TILA disclosure that the consumer must receive at least three business days before consummation, even if nothing has changed since the early TILA disclosure was provided. The proposal sets out two alternative approaches to address changes to loan terms and settlement charges during the three-business-day waiting period: receiving a new disclosure (and new waiting period) if any changes occur, or only when the APR becomes inaccurate or a variable rate feature is added. Consumer representatives and an industry member endorsed a strict three-day rule requiring a new disclosure and waiting period, with no waivers permitted. Other industry representatives supported a more flexible approach, such as allowing consumers to waive the three-day standard so that the closing could take place, and setting a threshold, with a de minimis exception, for the type or amount of changes that would trigger a new disclosure and waiting period.

The Board's proposal would also amend Regulation Z to provide limits on compensation to mortgage brokers and to creditors' employees who originate loans, prohibiting certain payments to originators based on the loan's terms or conditions. Several industry representatives expressed the view that the rule should apply only to loan originators, not to institutions that function as mortgage brokers, such as credit unions, community banks, or mortgage broker businesses; they stated that a broader application of the rule would have the effect of diminishing competition. Consumer representatives supported the rule and its classifications according to function, opposing any exception for brokers. One member urged the Board to consider means to ensure that the rules regarding compensation are applied consistently to banks and non-banks. In response to the proposal's prohibition on directing, or "steering," consumers to transactions that are not in their best interest in order to increase the originator's compensation, both industry and consumer representatives urged the Board to set forth a clearer, bright-line rule for what would constitute steering. A consumer representative noted that there is less risk of steering when a consumer is presented with multiple loan options.

Regarding HELOCs, the Board's proposal would prohibit creditors from terminating an account for payment-related reasons unless the consumer has failed to make a required minimum periodic payment for more than 30 days after the due date for that payment. An industry member supported the 30-day timeframe, but a consumer representative urged the Board to adopt a 60-day delinquency timeframe, consistent with the new delinquency period in the credit card context. The Board's proposal also would establish a new safe harbor for suspensions and credit-limit reductions and would impose additional requirements regarding reinstating accounts that have been temporarily suspended or reduced. Some members noted the impact on small businesses when HELOCs are suspended or the credit limit is reduced. Consumer representatives expressed the view that there should be a clear appeals process regarding line suspensions or reductions and that the lender should bear the costs associated with reinstating accounts, especially if later analysis shows that the line should not have been changed. Industry representatives also supported an appeals process, but stated that consumers should bear some of the cost, which could be refunded if the appeal is successful. An industry representative supported the proposed 30-day timeframe for lenders to complete an investigation of a request for reinstatement, but encouraged clarification that the time period would be triggered when the lender receives complete information from the borrower.

Foreclosure Issues

In each of its meetings in 2009, the Council discussed loss-mitigation efforts for mortgages, including the Administration's Making Home Affordable Program, the performance of modified mortgages, and other issues related to foreclosures. Members generally agreed on the need for more comprehensive and detailed data collection about mortgage delinquencies, foreclosures, and real estate owned (REO) properties.

Regarding the federal Making Home Affordable mortgage modification program, consumer representatives expressed concern about the capacity of servicers to handle the volume of requests and associated documentation, as well as delays in moving borrowers from trial modifications to permanent modifications. They also stated that some foreclosures are being filed while the borrower is in the trial modification period. Industry representatives stated that the need to fully document and completely underwrite loan modifications under the federal program leads to longer processing timeframes and compliance challenges. They also expressed the view that, in the early stages of the federal modification program, servicers were hampered by a lack of detailed technical guidelines and little advance notice of changes to the program, specifically noting the need for definition around the net-present-value model.

Later in 2009, some members pointed to signs of progress in the federal modification program, such as the increasing number of trial modifications initiated and borrowers evaluated for trial modifications. Industry representatives stated that, while participating servicers have increased their staffing and resources to implement the modification program, they face strict compliance requirements regarding documentation, as well as operational challenges in adjusting to changes to the program. Members agreed on the need for uniform loss-mitigation processes and guidelines to increase efficiency and reduce confusion among servicers and borrowers. One member noted that while most borrowers with trial modifications are making their payments, some are not able to do so because of economic hardship, such as job loss. Members generally agreed that the federal program does not adequately address the situations of jobless borrowers or those who are underwater on their loans.

A consumer representative expressed concern about the lack of information provided to borrowers who are denied a loan modification and the absence of an appeals process for the federal program. Members commended the Board for its work on fair-lending issues, particularly in the context of loan modifications. A consumer representative also urged the Board to monitor fair-lending issues related to the maintenance and disposition of REO properties by lenders.

Members raised concerns about the increasing prevalence of for-profit foreclosure consultants and foreclosure scams and emphasized the need for enforcement against such entities and warnings to consumers about not paying up-front fees for counseling or modification services. A consumer representative urged the provision of more resources for legitimate counseling agencies and legal services organizations to help guide distressed borrowers through the modification process. Members cited examples of successful collaborations among lenders, servicers, and nonprofit groups to engage in direct outreach with borrowers.

Several consumer and industry representatives endorsed a focus on principal write-downs as a key way to achieve sustainable modifications, and some members also suggested greater use of short sales in cases where an affordable modification cannot be achieved. Several consumer representatives expressed support for judicial mortgage modifications in the bankruptcy context and court-mediated resolution programs as additional tools to deal with foreclosures. Industry representatives cautioned that judicial modifications should be a last resort and should have reasonable limitations, such as being permitted only for subprime loans, and that the primary focus should be on achieving affordable modified payments for borrowers. Consumer and industry representatives disagreed about the value of second liens and the appropriate treatment of those loans both in the federal modification program and in the safety-and-soundness context.

Neighborhood Stabilization

Throughout 2009, the Council discussed the effects of foreclosures on the surrounding community, particularly in areas where foreclosures are concentrated, and efforts such as the federal Neighborhood Stabilization Program (NSP) to address the challenges of stabilizing communities. Members noted the negative effects of REO and vacant properties on neighborhoods, such as increased vandalism and crime, and the impact on the decisionmaking process of other homeowners who are struggling to stay current on their mortgage. They expressed concern about banks not maintaining their REO properties or not completing foreclosure sales, leading to "toxic titles," and urged federal regulators to increase oversight of regulated institutions regarding these issues. One member urged lenders and servicers to be attentive to the valuation process in the sale of REO properties and the effects of their property-disposition activities on housing prices and to focus on selling REO properties to owner-occupants.

Members described challenges in the implementation of the Neighborhood Stabilization Program (NSP), such as a lack of government infrastructure in some communities for managing the influx of federal funds and the reimbursement feature of the program. They noted that, given the relatively short implementation timeframe for the NSP, many local governments have opted for less complicated projects such as land banks or closing-cost assistance, rather than more complex acquisition and rehabilitation efforts. They also pointed to some positive developments, such as the NSP's provision of technical assistance and a move toward collaborative efforts on the local level, often led by community development organizations. They expressed support for initiatives to capitalize community development financial institutions (CDFIs) and other community development groups that can play important roles in neighborhood revitalization. Members noted that the CDFI industry serves as a key funding source for small businesses and other economic development activities, particularly in low- and moderate-income communities.

One member noted that the National Community Stabilization Trust is working to provide tools to address the issues of neighborhood stabilization and vacant and abandoned properties, such as a clearinghouse for REO properties between servicers and communities. However, members also described the difficulties in working with local governments regarding acquisition of REO properties due to the lack of standard purchase agreements. Members noted that nonprofit groups face significant challenges in addressing REO issues, from holding troubled properties to finding credit-worthy homebuyers and managing scattered-site rental properties. Finally, one member urged that further guidance be provided regarding the implementation of the Protecting Tenants at Foreclosure Act of 2009.

Other Discussion Topics

At the March meeting, the Council addressed issues related to the availability and quality of credit, particularly for consumers and small businesses. Members discussed measures that aim to restore the flow of critically important credit as well as the current state of lending, including the types and quality of credit products and terms that are available to consumers.

An industry representative commented on the experience of credit card issuers, which face increased funding costs and a sharp increase in loan losses and are responding by repricing and cutting credit lines; he also noted that Congressional action is likely to impact the overall business model of the credit card industry and access to credit. One member stated that increased monthly payments and interest rates for credit cards can exacerbate the cyclical problems that consumers and the industry are facing; another member expressed concern that individual issuers' actions in terms of risk-based pricing for credit cards may work to increase systemic risk. Some members also noted that credit cards and home-equity lines of credit are key sources of capital for small businesses, which face difficulties when those sources of funding are cut off.

A consumer representative stated that some consumers are still being offered credit products that raise concerns, and an industry representative noted the need for quality products that will help bring people who have experienced foreclosures or bankruptcy during the crisis back into the conventional credit market. One member urged attention to potentially problematic credit products, such as tax refund anticipation loans and short-term loans from banks, which may become more appealing to cash-strapped borrowers who cannot access other forms of credit. One member pointed to the need for both access to credit and quality of credit and the difficulties faced by individuals who have thin or no credit files; the member urged the Federal Reserve to study options for generating alternative sources of credit data to analyze consumers who do not have a traditional credit file.

Members praised the Federal Reserve's steps to bolster the markets for securitized assets and recommended further attention to the markets for Small Business Administration loans and affordable multifamily financing through the Low Income Housing Tax Credit.

At the June meeting, Council members focused on the future of the Community Reinvestment Act (CRA), including possible changes in light of developments in the financial services industry. Members discussed the idea of extending the CRA beyond depository institutions, such as to non-bank affiliates of depository institutions or to other non-bank financial services providers, such as credit unions or insurance companies. Several members noted that non-depository institutions benefited from government interventions during the financial crisis and should be subject to the responsibilities of CRA in exchange for such benefits. Members also expressed support for expanding the CRA to cover financial services and products beyond lending. One member noted that over the years regulators have added products for which institutions can receive CRA credit, but that the process of measuring the impact of such products needs improvement. A consumer representative suggested that CRA coverage should be extended to members of federally protected classes, such as racial and ethnic groups, women, and persons with disabilities, to ensure fair lending and the availability of quality financial products and services for those individuals.

Several industry representatives noted that the CRA's original purpose focused on serving low- and moderate-income communities from which deposits were taken and cautioned that expanding the CRA, whether to include other products and institutions or to address fair-lending issues, could dilute that purpose and the regulation's impact. An industry representative also expressed concern about the burden of complying with the CRA, particularly for smaller institutions. Both consumer and industry members agreed that any reexamination of the CRA should include attention to the quality and sustainability of credit, not just the quantity of credit.

Also at the June meeting, members provided input on the Board's rulemaking regarding the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). Some members expressed the view that loss-mitigation personnel should be exempt from the SAFE Act's licensing requirements. Several members supported applying the requirements to personnel who provide refinancings. One member encouraged the Board to adopt a "grandfathering" approach for existing originators and to set stricter requirements for education and testing for loan officers at regulated depository institutions.

13. The foreign banking organizations examined by the Federal Reserve are organizations that operate under section 25 or 25A of the Federal Reserve Act (Edge Act and agreement corporations) and state-chartered commercial lending companies owned or controlled by foreign banks. These institutions are not subject to the Community Reinvestment Act and typically engage in relatively few activities covered by consumer protection laws. Return to text

14. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and Office of Thrift Supervision (OTS). Return to text

15. The 2009 reporting period for examination data includes examinations with end dates between July 1, 2008, and June 30, 2009. Return to text

17. The FFIEC member agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA). Return to text

25. Because the agencies use different methods to compile the data, the information presented here supports only general conclusions. The 2009 reporting period was July 1, 2008, through June 30, 2009. Return to text

26. Public enforcement actions are categorized by regulation throughout the report. Because some enforcement actions include violations of more than one regulation, the overall sum of actions derived from each regulation will be greater than the actual total number of enforcement actions initiated, which was 30. Return to text

27. The FDIC's reported information in this area relates to Part 332--Privacy of Consumer Financial Information--of the agency's regulations and not Regulation P. Return to text